New York State Court of Appeals Upholds Employers’ Right to Allow Service Employees Who Have Limited Supervisory Authority to Receive Tips

June 2013 – AlertsLabor & Employment AlertBy Carolyn D. Richmond

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On May 26, 2013, the New York State Court of Appeals, New York’s highest court, issued a long-awaited decision in two lawsuits against Starbucks Corporation. In its decision, the Court of Appeals held that:

Employees with a limited degree of supervisory authority may receive tips.

The appropriate test to apply when determining whether an employee with a limited amount of supervisory authority may receive a share of tips is whether: (a) that employee is primarily engaged in service to patrons; and (b) the employee exercises “meaningful or significant authority or control over subordinates.”

“Meaningful control” may include the authority to: (a) discipline subordinates, (b) assist in performance evaluations, (c) participate in the process of hiring or terminating employees, and (d) assist in the creation of employee work schedules, thereby directly influencing the number of hours worked by staff as well as their compensation.

An employer can generally exclude otherwise tip eligible employees from a tip pool.

Background

In the first case, Barenboim v. Starbucks Corp., a class of baristas who worked at Starbucks locations in New York filed a lawsuit claiming that Starbucks’ practice of requiring baristas to share their tips with employees classified as “shift supervisors” violated Section 196-d of New York’s Labor Law (Section 196-d). Baristas and shift supervisors are hourly wage employees who are primarily responsible for serving food and beverages to customers. Shift supervisors also have some supervisory responsibilities, such as assigning baristas to particular positions during their shifts, directing the flow of customers, and providing baristas with feedback about their performance. Shift supervisors may also open and close stores, change the cash register tills, and, if neither an assistant store manager nor store manager is present, make bank deposits.

In the second case, Winans v. Starbucks Corp., a class of New York assistant store managers who worked at Starbucks alleged that Starbucks’ policy prohibiting the sharing of tips with assistant store managers violated Section 196-d. Assistant store managers function as the second in command at each Starbucks location. They assist store managers, who are in charge of each location, in interviewing applicants, assigning work shifts to baristas and shift supervisors, and evaluating employee performance. They also participate in decisions to hire or fire employees, recommend corrective action for employee infractions, and process payroll. Despite these roles and responsibilities, assistant store managers devote the majority of their time performing customer-oriented services.

The Barenboim plaintiffs argued that Section 196-d expressly prohibits employers from requiring service employees to share tips with anyone who had any supervisory authority no matter how small or minor. Accordingly, they argued that requiring the sharing of tips with shift supervisors who had the power to direct baristas during the course of a shift violated Section 196-d.

Contrary to this argument, the Winans plaintiffs argued that Section 196-d required Starbucks to include assistant store managers in the tip sharing system because they were primarily engaged in customer service and guests thought that the tips they were leaving would be distributed amongst the employees who served them, including assistant store managers.

The New York Court of Appeals rejected both of these arguments. With respect to the claims asserted in the Barenboim action, in accordance with at least a decade’s worth of New York State Department of Labor guidance and a multitude of federal court decisions, the Court held that service employees can participate in a tip sharing system even if they possess a modicum of supervisory authority.

With respect to the arguments asserted in the Winans action, the Court held that an employer has discretion to craft mandatory tip sharing systems — even if that includes the elimination of certain classes of employees from a tip pool. However, the Court cautioned that was an outer limit to an employer’s ability to carve out employees from a tip pool. For example, the Court noted that an employer could not give all of the tips to the highest-ranking eligible employee.

Practical Implications

Despite Plaintiffs’ counsel’s best efforts to re-open the floodgates of tip pooling litigation, the Court’s holdings essentially maintain the status quo but provides the industry with some much needed judicial support for what was long assumed to be the law. The Court’s decision permitemployees with a limited amount of supervisory authority to participate in a tip sharing program provided they did not perform managerial functions. If the employee has the ability to affect a subordinate’s compensation – by preparing work schedules, participating in interviews of applicants for open positions, disciplining the employee, sitting in on manager meetings, or evaluating staff — than that employee should not participate in a tip pool. Accordingly, it is incumbent on all hospitality employers to ensure that employees such as captains, maître d’s and sommeliers are not setting schedules, participating in the interviewing process, sending employees home, writing up employees on discipline forms, or similar activities that impact the number of hours worked by employees or their compensation. Although it will now be left to the lower courts to interpret the Court of Appeals decision, it appears likely that maître d’s and captains will be permitted to perform “closing” functions and still keep their tip eligibility. Nonetheless, employees must not confuse this ruling with the 80/20 rule — the Starbucks decision only concerns whether supervisors can participate in tip pools/share, not whether a tipped employee has met the 80/20 rule in terms of the amount of tipped duties v. non-tipped duties to remain tip eligible. The decision also appears to validate the actions of many employers to pull certain non-directly tipped employees such as baristas, polishers, or expeditors who may perform some direct guest service out of a tip pool provided employers pay these employees a direct wage that either meets or exceeds the regular minimum wage.